Mortgage Fears Hammer Stock Market Again
Worries about mortgage foreclosures whacked the giants of Wall Street again on Tuesday as more investors disregarded some analysts’ views that the concerns are, for the most part, overblown.
The question now is how much the U.S. stock market will suffer because home mortgage lenders had provided loans without requiring income documentation (via no doc loans), low down payments or insufficient collateral to people with poor credit histories.
Such loans are known as subprime, or bad credit mortgages.
The initiation of foreclosures on U.S. home loans accelerated in the fourth fiscal quarter to the fastest pace since the Mortgage Bankers Association began tracking them 37 years ago.
Tuesday’s nearly 3 percent drop by the S&P Financials index, which includes 88 companies, erased about $13 billion in investor wealth.
The bad credit mortgage loan industry lubricates Wall Street’s cash machine, so to speak, as investment banks package all types of mortgage loans into securities backed by mortgage payments and then sell them off to pension funds and other institutional investors.
Over the past 18 months, virtually all mortgage lenders loosened standards for making loans, Morgan Stanley analyst Kenneth Posner said in a research note.
Last year, Bear Stearns cut subprime originations in half, but its shares tumbled 6.3 percent in afternoon trade on the New York Stock Exchange, leading a pack of Wall Street firms whose shares took a hit.
Merrill Lynch’s Guy Moszkowski said earlier in the day that Bear Stearns executives, CFO Sam Molinaro and COO Warren Spector, were mostly relaxed on the subject of subprime lending during a recent meeting.
“Both managers showed little concern with the [bad credit mortgage] meltdown, although we met with them before the market grew considerably worse,” Moszkowski said in a research note.
Investors are plenty concerned, though.
Even Goldman Sachs fell 1.3 percent after the investment bank blew the lid off analysts’ estimates with record fiscal first-quarter profits of $3.2 billion. The third largest U.S. bank, JPMorgan, fell 4 percent.
In a move reminiscent of the dot-com bust, Massachusetts’ top securities regulator issued subpoenas for documents from UBS Securities LLC and Bear Stearns over research analysis of subprime lenders.
Separately, Rep. Barney Frank, a Massachusetts Democrat, said he planned to introduce legislation that would restrict the riskiest mortgages from being made amid the current turmoil in the subprime market.
Shares of Friedman Billings Ramsey Group Inc, a small investment bank, fell 14 percent to $4.77, and while Wells Fargo Home Mortgage, one of the largest U.S. home mortgage providers, fell 5 percent.
SOURCE: Reuters